What does FOMO mean in financial markets?

Financial markets?

After hearing the term FOMO, some of you may think that this is a Latin word for advertising a product. However, you should know that this word stands for fear of missing out. In general, we all experience this feeling in life. But this feeling will be slightly different from the perspective of the financial markets. FOMO can not only have a negative emotional impact on a trader but can also overshadow the judgment and logic of a trader. Therefore, one may face problems when making business decisions. In this article, you will be familiar with the concept of FOMO and solutions to prevent it.

Who first coined the term FOMO?

Although Dan Herman claims he first discovered the problem in 1990, Patrick McGinnis formally and explicitly introduced FOMO in a 2004 article. This concept refers to the feeling of anxiety and worry that comes to traders after hearing other people’s positive or unique experiences. Some traders feel like this because others have experienced it, but these traders have missed this positive experience.

This phenomenon spreads easily in the social media space. Therefore, others share their lives’ positive and valuable parts, while the reader misses this opportunity. So, the reader faces a sense of apprehension, anxiety and fear. Suppose the exam date is close and you have to study. But before you start, you decide to take a look at social media. Since the number of these social media is constantly increasing, at least it will take 20 or 30 minutes to check 3 or 4 of them. So, you lose your valuable time when you need to study because of fear of missing new events in this space.

The concept of FOMO in financial markets

FOMO gives traders the feeling that they may miss excellent opportunities or that other traders may be more successful. In such a situation, this feeling may lead to trading without sufficient thinking or closing positions at the wrong time. The reason is that others seem to be doing the same. In some cases, they may even put their capital at risk because of insufficient research on market capacity.

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For some investors, this feeling happens as soon as others gain success. Therefore, the transactions that are related to FOMO can be a sign of greed and jealousy in the person. For example, after seeing the success of a group of traders who have recently bought gold, you try to do the same and buy gold after five days. But unfortunately, in the end, you close your position with a loss while others profit.

You will ask yourself, why did this happen to me? The answer is that because you entered the market with delay, it is likely that the market is no longer moving in your desired direction. The point is the more the market moves in one direction, the more the trades with this feeling will be. However, the continuation of this trend will not last for a long time, and the trend will change in the near future when the price reaches support and resistance levels. This is a common problem among both novice and experienced traders.

Common emotions in trades related to FOMO

If any of the following interfere in your trades, your problem is probably related to FOMO:

• Greed: If you think only about profit in your trades and enter into a deal based on this perspective or want to earn all the profits in a short time, you have fallen into the trap of greed.
• Fear: Fear of losing the position that other successful traders have, causes a person to trade without thinking and only imitating others, which ultimately leads to failure.
• Excitement: Imagine the EUR/USD currency pair on the sell position has made a good profit for traders in the market. Every day you receive signals from other people that it is time to invest in this currency pair. Now, suppose you trade without thinking and analyzing the market and only based on what others say. In that case, your trading will be due to excitement.
• Jealousy: By seeing other people’s successful trades and high profits, you may try to increase your profit like them or sometimes even more than them by making numerous trades. This feeling, which is usually caused by jealousy among traders, will eventually drastically reduce your account balance.
• Having no trading strategy: Most people who fall into the trap of FOMO suffer from a lack of trading strategy. These people often trade without a plan and purpose and only rely on their feelings about buying or selling assets.

How to prevent FOMO?

Now that you know the influential factors leading to FOMO, we discuss practical solutions to deal with it in this section.

• First, accepting this problem: Using phrases like I am entirely in control of all my business activities is destructive. Saying these sentences will make you more involved with FOMO instead of solving the problem.
• Second, considering the psychology of trades: FOMO, which is closely related to concepts such as fear and greed, is considered a market psychology issue. As long as emotions overwhelm you, your decisions are not logical. So instead of thinking that you missed a trading opportunity or that others were able to take advantage of the opportunity and you could not, try to control your emotions to go through the decision-making process correctly. To control your emotions, you should evaluate your strengths and weaknesses.
• Third, risk management: If feelings such as fear or greed motivate you to make a deal, using risk management will be the solution to deal with it. You may think others are trading in this market, so this market is not dangerous. However, such thoughts only increase the risks in your trading activities. To deal with such thoughts, you need to be fully aware of your emotions and control them on time.
• Fourth, planning: As long as you stick to a specific trading plan, you can achieve great success in the financial markets in the long run. Keep in mind that each trader has a unique trading strategy with different aspects and features. So, you also need to make a trading strategy for yourself.

Conclusion

Today, due to the significant expansion of facilities in the financial markets, the fear of losing profit opportunities leads to FOMO, and as a result, a trader may lose a lot of money. FOMO is formed due to emotional decisions in the market, and the continuation of such decisions raises the price of a particular commodity in the market. However, after such a situation, the trend in the market will reverse very soon. In the meantime, traders who have entered the market with high prices will suffer.
What can reduce FOMO and the resulting trading risk is controlling emotions and having a plan for trades. Therefore, logic and thinking should always be replaced by emotions during trading activities.